Adrian Brass’s performance record over the past two years seems to support the old assumption that stubbornness, or conviction, as it is often called, is an essential quality in fund management.
In 2008, the Fidelity manager underperformed the S&P 500 by 5% in the Luxembourg-based America fund he runs. He attributes this failure to his stockpicker bias towards the mid-cap universe. He says the liquidity crunch in November 2008 had an “exceptional, once-in-a-generation” impact on mid-cap stocks.
Mr. Brass stuck to his old hunting-ground and bought a lot of beaten-up stocks in homebuilders, logistics companies and semiconductor manufacturers at the end of the year. The strategy proved highly successful in 2009, and he ended up outperforming the index by 12 percentage points over the year, taking his total cumulative track record on the America fund into positive territory against the benchmark.
The bet has also been lucrative for investors in the UK-registered Fidelity American Special Situations fund, which Mr. Brass took charge of when the previous manager, Bob Haber, retired last March.
Mr. Brass is optimistic the rally will continue in the short term. He points out that corporate America has taken a bigger “knife to costs” than at any time in its history. While this has not always been welcomed among employees, savings of on average 8% of operating costs have had a dramatic impact on the bottom line, pushing earnings far beyond analysts’ forecasts.
Skeptics point out that cost-cutting is the kind of trick that only works once, but Mr Brass believes its effects will continue to be felt this year.
Combined with the re-emergence of sales growth as the country moves out of recession, he says cost control should continue to drive the US stock market back towards pre-crisis normality, in the immediate future, at least.
His longer-term outlook is less rosy, however, and he has been gradually rotating his portfolio out of the cyclical stocks that did well during the initial stages of the bounce into what he refers to as secular growth plays, stocks in sectors such as healthcare and IT services that can grow even as consumers and governments retrench.
Secular growth stocks, which performed less well last year, meet both of Mr. Brass’s two investment criteria. These are first that a stock has significant “valuation upside”, the potential to rise in price, and second that a clear catalyst exists for that upside to be realized. Mr. Brass thinks unexpectedly strong earnings will put a premium on the less racy growth companies this year.